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Keltner Channel Fadebands built from range, not deviation

Evidence: ModerateIntermediateMean reversion · Volatility band

A Keltner channel measures the same distance as a Bollinger band but with a different ruler: average true range instead of standard deviation. Range reacts to gaps and spikes differently from deviation, so the two bands disagree exactly when it matters most.

In practice the Keltner channel is the steadier of the two — it does not contract as violently before a breakout, which means fewer false extremes and fewer signals.

The evidence here is for reversion itself, not for this particular measure of it. The ruler below is a way of deciding when price has stretched far enough — it is not what makes it come back.

Category
Mean reversion · Volatility band
Timeframe
M15 primary · H1 for context
Suitable pairs
EURUSD · USDCHF · AUDUSD · XAUUSD
Session
London and New York
Indicators / tools
Keltner Channel — EMA(20) with 2 × ATR(10) · ADX(14)

Valid setup

MR-05 · KELTNER CHANNEL FADE — VALID SETUP AUDUSD · M15 · the band is built from ATR, not deviation — note how much steadier it runs LONG 0.65559 0.65615 0.65672 0.65729 0.65785 0.65842 0.65898 to the mean 1R Keltner — EMA(20) ± 2 × ATR(10) TARGET = centre line ENTRY STOP 1 2 3 4 0.65718 0.65686 0.65606 ① ADX under 20 ② A candle closes below the lower Keltner band ③ The channel has not widened — ATR is steady ④ Next candle closes back inside — enter at that close ⑤ Stop and band measured in the same ATR units ⑥ Target the EMA(20) centre line

Exact rules

Entry

  • Range gate: ADX(14) below 20.
  • Setup: a candle closes below the lower Keltner band, EMA(20) minus 2 × ATR(10).
  • Trigger: the next candle closes back inside the channel. Enter at that close.
  • Extra filter worth testing: require the Bollinger band to agree. When the two rulers disagree, the move is usually a volatility event rather than a stretch.

Stop loss

  • Below the excursion low, plus 0.3 × ATR(10).
  • Because the channel uses ATR, the stop and the band are measured in the same units — the stop cannot be tight while the band is wide.
  • Risk 0.5%–1%.

Take profit / exit

  • The centre line — the EMA(20).
  • Time exit after twelve bars.
  • No trailing, for the same reason as every other page in this book.

Build Keltner Channel Fade

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More from Mean reversion

RSI(2) Extremesthe short-period oscillatorBollinger Band Fadetwo standard deviationsZ-Score Reversionthe distance, stated plainly

Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.